Final answer:
The collection of the insurance premium affected the accounting equation, increasing both cash and unearned revenue. After four months, part of the unearned revenue is recognized as earned, affecting the revenue on the income statement without altering cash flows, as cash was already received.
Step-by-step explanation:
When Christopher Company collected $1,200 for an agreement to provide one year of insurance coverage starting September 1, this transaction affected its accounting equation, income statement, and cash-flow statement. The initial collection of cash increased both assets (Cash) and liabilities (Unearned Revenue) in the accounting equation. By December 31, four months of insurance coverage has been provided, so the company adjusts its accounts to recognize the earned revenue.
The accounting equation after recognizing earned revenue for four months would reflect a decrease in liabilities (Unearned Revenue) and an increase in shareholders' equity (Earned Revenue), specifically in the revenue account on the income statement. This equates to 4/12 (one-third) of the annual $1,200 premium, or $400, being recognized as revenue. Consequently, the Unearned Revenue liability is reduced by $400, and the Earned Revenue is increased by $400. So, the adjusted entry would be a credit to Unearned Revenue and a debit to Earned Revenue (or Service Revenue).
The income statement would now show $400 in Service Revenue for the insurance coverage provided up to December 31. Since this was a cash transaction at the beginning, there is no impact on the cash flow from this recognition on December 31, as the cash had been received on September 1. The cash-flow statement reflects the initial inflow of cash back in September, categorized under cash flows from operating activities as cash received from customers.